Technical Assistance Consultant’s Report Project Number: TA 6499 REG: Strengthening Governance and Accountability in Pacific Island Countries (Phase 2) December 2010 Nauru: Public Financial Management Performance Report Prepared by John Leonardo PDP Australia Pty Ltd, Sydney, Australia This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.) PDP AUSTRALIA PTY LTD NAURU: Public Financial Management Performance Report Contents Abbreviations ....................................................................................................................... ii Summary Assessment ........................................................................................................... 4 Assessment of Performance ................................................................................................................ 4 I. Introduction ............................................................................................................. 10 1.1 Objective of the Public Financial Management – Performance Report (PFM-PR) ...... 10 1.2 Process of preparing the PFM-PR ....................................................................................... 10 II. Country Background Information........................................................................... 12 2.1 Country Economic Situation ....................................................................................................... 12 2.2 Description of Budgetary Outcomes ......................................................................................... 15 2.3 Description of the legal and institutional framework for PFM .............................................. 17 III. Assessment of the PFM Systems, Processes and Institutions ................................ 20 3.1 Budget Credibility.......................................................................................................................... 20 3.2 Transparency and Comprehensiveness ...................................................................................... 24 3.3 Policy Based Budgeting ................................................................................................................ 31 3.4 Predictability and Control in Budget Execution ....................................................................... 33 3.5 Accounting, recording and reporting ......................................................................................... 45 3.6 External scrutiny and audit .......................................................................................................... 49 3.7 Donor Practices ............................................................................................................................. 53 IV. Government reform process .................................................................................... 56 4.1 Description of recent and on-going reforms ............................................................................ 56 4.2 Institutional factors supporting reform planning and implementation ................................. 57 Annex 1: Summary Table of PFM Performance Indicator Ratings ................................... 58 Annex 2: Sources of Information ........................................................................................ 63 Annex 3: List of People Met ................................................................................................ 65 Annex 4: Workshop Attendance ......................................................................................... 66 Page i PDP AUSTRALIA PTY LTD NAURU: Public Financial Management Performance Report Abbreviations AMU Aid Management Unit ADB Asian Development Bank AGAs Autonomous government agencies AusAID Australian Agency for International Development COFOG Classification of Functions of Government DPPD Development Planning and Policy Division EHC EIGIGU Holdings Corporation EU European Union FBO Final budget outcome GFS Government Finance Statistics GoN Government of Nauru ICT Information and communications technology IMF International Monetary Fund IPSAS International Public Sector Accounting Standards ISPPIA International Standards for the Professional Practice of Internal Auditors MPs Members of Parliament MDAs Ministries, Departments and Agencies MYOB Mind Your Own Business NSDS National Sustainable Development Strategy NAC Nauru Agency Corporation NFMRA Nauru Fisheries & Marine Resources Authority NPRT Nauru Phosphate Royalties Trust NRC Nauru Rehabilitation Corporation NPV Net Present Value NZAID New Zealand Agency for International Development PALCO Pacific Aircraft Leasing Holding Corporation PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PFM-PR Public Financial Management Performance Report PFTAC Pacific Financial Technical Assistance Centre PACTAM Pacific Technical Assistance Mechanism PFA Public Finances (Control and Management) Act 1997 PI Performance indicator RON Republic of Nauru Page ii PDP AUSTRALIA PTY LTD NAURU: Public Financial Management Performance Report SIDS Small island developing state SOPAC Pacific Islands Applied Geosciences Commission SPC South Pacific Commission SOE State owned enterprise SN Sub-national TOR Terms of Reference UN United Nations UNDP United Nations Development Programme WHO World Health Organization YALCO Yarren Aircraft Holding Corporation Currency and indicative exchange rates Local currency unit = Australian Dollar (A$) 1 US dollar = A$ 1.0084 (16 December 2010) Fiscal Year 01 July -30 June Page iii PDP AUSTRALIA PTY LTD NAURU: Public Financial Management Performance Report SUMMARY ASSESSMENT Assessment of Performance This Public Financial Management Performance Report (PFM-PR) was prepared at the request of the Government of Nauru (GoN). The purpose of this PFM-PR is to provide a baseline measurement of current PFM performance standards in Nauru using the Public Expenditure and Financial Accountability (PEFA) Performance Measurement Framework developed by the PEFA partners1 as a tool that can provide reliable information on the performance of PFM systems, processes and institutions over time. The PFM-PR does not assess government policies or capacity levels. The assessment of current PFM systems against the indicators used in the PEFA framework and the preparation of the PFM-PR was undertaken by a consultant team engaged by the Asian Development Bank (ADB) under ADB’s technical assistance for strengthening governance and accountability in Pacific Island Countries (Phase 2).2 The supporting analysis for the PFM-PR is based on the Government of Nauru (GoN)’s PFM performance in the three financial years 2008-10. This is the first PEFA assessment completed for the GoN. i. Integrated assessment of PFM Performance Overview Nauru has an underdeveloped PFM system. The country has been gradually moving into a new era of PFM since the election of a reformist government in 2004. Unsatisfactory PFM practices have been put aside and a period of fiscal restraint has been initiated. Supporting measures have included the application of an effective expenditure control system resulting in the achievement of actual (or near) balanced overall budgets in recent financial years. Donors have contributed a high level of technical assistance in several PFM areas over the last three financial years that has substantially provided the foundations for implementing PFM improvements. Many of the poor indicator scores outlined in this report are attributable to historic weaknesses or gaps in Nauru’s PFM system. Action to address some of these weaknesses is already under way. This PFM-PR assessment provides a baseline of current PFM performance levels and a platform from which a robust plan can be prepared to address key areas of identified PFM weaknesses. The overall results of the assessment of PFM performance are set out in Table 1 below whilst a summary of the rationale for individual indicator assessments is provided in Annex 1. 1 PEFA partners are the World Bank, EC, IMF, French Ministry of Foreign Affairs, DFID, the Royal Norwegian Ministry of Foreign Affairs and the Swiss State Secretariat for Economic Affairs. 2 ADB. 2008. Strengthening Governance and Accountability in Pacific Island Countries (Phase 2). Manila (TA 6499-REG for $1,900,000, approved on 3 November 2008, cofinanced by the Japan Special Fund and the Government of Australia). Page 4 PDP AUSTRALIA PTY LTD NAURU: Public Financial Management Performance Report Table 1: Summary of overall results PFM Performance Indicator Scoring Dimension Rating Overall Method i Ii iii iv Rating A. PFM OUT-TURNS: Credibility of the budget PI-1 Aggregate expenditure out-turn compared to original M1 N/R N/R approved budget PI-2 Composition of expenditure out-turn compared to original M1 N/R N/R approved budget PI-3 Aggregate revenue out-turn compared to original approved M1 N/R N/R budget PI-4 Stock and monitoring of expenditure payment arrears M1 D B D+ B. KEY CROSS-CUTTING ISSUES: Comprehensiveness and Transparency PI-5 Classification of the budget M1 D D PI-6 Comprehensiveness of information included in budget M1 C C documentation PI-7 Extent of unreported government operations M1 N/R A N/R PI-8 Transparency of inter-governmental fiscal relations M2 N/A N/A PI-9 Oversight